R.R. Donnelley & Sons Co.
(
RRD
) reported third quarter 2012 non-GAAP earnings of 51 cents per
share, which comfortably exceeded the Zacks Consensus Estimate of
45 cents. However, earnings remained flat on a year-over-year
basis.
Quarter Details
Revenue declined 6.5% year over year to $2.51 billion and fell
shy of the Zacks Consensus Estimate of $2.56 billion. The
year-over-year decline was primarily due to unfavorable foreign
exchange, declining prices and adverse impact of lower
pass-through paper sales.
Moreover, the decline in total revenue was led by an 8.2%
year-on-year fall in the Product revenue to $2.17 billion,
partially offset by a 6.0% year-over-year increase in Services
revenue to $337.6 million.
U.S. Print and Related Services revenue was down 6.4% from the
previous-year quarter to $1.85 billion, due to significant lower
volumes along with continued pricing pressure across the segment
and reduced pass-through paper sales. International sales
declined 6.9% year over year to $655.4 million during the
quarter.
Non-GAAP operating expenses decreased 4.7% year over year to
$2.31 billion, primarily attributed to a lower selling, general
& administrative (SG&A) expense (down 14.9% year over
year). As a percentage of total revenue, SG&A expense was
10.1% in the reported quarter versus 11.1% in the year-ago
quarter. The improvement was primarily attributed to higher
productivity and variable cost control, coupled with lower
pension expense.
The lower operating expense drove the operating results.
Operating income on a non-GAAP basis improved 5.3% year over year
to $201.9 million in the quarter. Operating margin increased to
8% from 7.1% in the year-ago period.
However, higher interest expense (up 1.3%) and income tax
expense (up 46.2%) negatively impacted net income in the quarter.
Donnelley reported net income of $92.7 million or 51 cents per
share (excluding one-time items) compared with $98.7 million or
51 cents in the year-ago quarter.
Donnelley exited the quarter with $392.9 million of cash
versus $369.0 million in the previous quarter. Long-term debt
remained at $3.42 billion at the end of September 30, 2012.
Outlook
For fiscal 2012, Donnelley expects revenue to be in the range
of $10.1 billion to $10.2 billion. Operating margin is forecasted
in the range of 7.2% to 7.3%.
Donnelley expects non-GAAP earnings guidance in the range of
$1.84 to $1.92 per share. Non-GAAP effective tax rate is expected
between 30% and 33%. Free cash flow is expected to be
approximately $450 million.
Recommendation
Donnelley is expanding its scope beyond traditional markets
primarily through acquisitions. The company's continued focus on
acquisitions will also spur its already dominant market position
and drive long-term growth. Moreover, the company's multi-million
dollar contract wins from various companies such as Metro Inc.,
Chrysler and
Office Depot Inc.
(
ODP
) are the other long-term positive catalysts.
However, we expect Donnelley to remain under pressure in the
near term due to weak macroeconomic conditions prevailing in most
of its current as well as prospective markets. Moreover,
continuing pricing pressure, volatility in raw material prices, a
highly leveraged balance sheet, and increasing competition from
Quad/Graphics, Inc.
(
QUAD
) and Dai Nippon Printing Co. Ltd. are significant headwinds
going forward.
We have a Neutral recommendation over the long term (6-12
months). Currently, Donnelley has a Zacks #4 Rank, which implies
a Sell rating in the short term (1-3 months).
OFFICE DEPOT (ODP): Free Stock Analysis
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QUAD GRAPHICS (QUAD): Free Stock Analysis
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DONNELLEY (RR) (RRD): Free Stock Analysis
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